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A bank has the following balance sheet ASSETS LIABILITIES Cash = 3 Retail Deposits (stable) =...

A bank has the following balance sheet

ASSETS	LIABILITIES
Cash = 3	Retail Deposits (stable) = 25
Treasury Bonds (>1 year) = 5	Retail Deposits (less stable) = 15
Corporate Bonds Rated A = 4	Wholesale Deposits = 44
Residential Mortgages = 18	Preferred Stock (> 1 yr) = 4
Small Business Loans (<1 yr) = 60	Tier 2 Capital = 3
Fixed Assets = 10	Tier 1 Capital = 9
TOTAL = 100	TOTAL = 100

(a) What is the Net Stable Funding Ratio?

(b) The bank decides to satisfy Basel III by raising more retail deposits and keeping the proceeds in Treasury bonds. What extra retail deposits need to be raised?

Expert Solution

A bank has the following balance sheet
ASSETS	Required stable funding (RSF) factor	Required amount of stable funding = Asset *RSF factor	LIABILITIES	Available stable funding (ASF) factor	Available amount of stable funding = Asset *ASF factor
Cash = 3	0%	3 *0% = 0	Retail Deposits (stable) = 25	90%	25 *90% = 22.50
Treasury Bonds (>1 year) = 5	5%	5*5% = 0.25	Retail Deposits (less stable) = 15	80%	15*80% = 12
Corporate Bonds Rated A = 4	50%	4 *50% = 2	Wholesale Deposits = 44	50%	44 *50% = 22
Residential Mortgages = 18	65%	18*65% = 11.7	Preferred Stock (> 1 yr) = 4	100%	4*100% = 4
Small Business Loans (<1 yr) = 60	85%	60*85% = 51	Tier 2 Capital = 3	100%	3*100% = 3
Fixed Assets = 10	100%	10*100% = 10	Tier 1 Capital = 9	100%	9*100% = 9
TOTAL = 100		74.95	TOTAL = 100		72.50

(a) What is the Net Stable Funding Ratio?

The Net Stable Funding Ratio (NSFR) = available stable funding (ASF) / required amount of stable funding (RSF)

= 72.50 /74.95

= 0.9673 or 96.73%

(b) The bank decides to satisfy Basel III by raising more retail deposits and keeping the proceeds in Treasury bonds. What extra retail deposits need to be raised?

The bank will satisfy Basel III, if The Net Stable Funding Ratio (NSFR) will be more than 100%

The bank decides to satisfy Basel III by raising more retail deposits and keeping the proceeds in Treasury bonds

Extra retail deposits need to be raised =3 (approx.)

Note: It is assumed that Retail Deposits (stable) to be raised; therefore it will be 25 + 3 = 28 and Treasury bonds will be 5 + 3 = 8

In that case;

A bank has the following balance sheet
ASSETS	Required stable funding (RSF) factor	Required amount of stable funding = Asset *RSF factor	LIABILITIES	Available stable funding (ASF) factor	Available amount of stable funding = Asset *ASF factor
Cash = 3	0%	3 *0% = 0	Retail Deposits (stable) = 25	90%	28 *90% = 25.20
Treasury Bonds (>1 year) = 5	5%	8*5% = 0.40	Retail Deposits (less stable) = 15	80%	15*80% = 12
Corporate Bonds Rated A = 4	50%	4 *50% = 2	Wholesale Deposits = 44	50%	44 *50% = 22
Residential Mortgages = 18	65%	18*65% = 11.7	Preferred Stock (> 1 yr) = 4	100%	4*100% = 4
Small Business Loans (<1 yr) = 60	85%	60*85% = 51	Tier 2 Capital = 3	100%	3*100% = 3
Fixed Assets = 10	100%	10*100% = 10	Tier 1 Capital = 9	100%	9*100% = 9
TOTAL = 100		75.10	TOTAL = 100		75.20

The Net Stable Funding Ratio (NSFR) = available stable funding (ASF) / required amount of stable funding (RSF)

= 75.20 /75.10

= 1.0013 or 100.13%

As the Net Stable Funding Ratio (NSFR) is more than 100%, therefore it satisfies Basel III.

jeff jeffy answered 6 months ago

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